Only 66 of the 506 people in a detention centre on the Pacific island of Naura have been deemed refugees, Australia's immigration department announced yesterday.

The decision paves the way for the closure of the camp which has become synonymous with Australia's so-called "Pacific solution", under which most of its refugees have been processed in offshore detention camps.

Three-quarters of Nauru's inmates were from Afghanistan, a country now deemed by the UN commission for refugees to be safe. The Australian immigration department (Dima) said that those who have been turned down will be returned to their countries, but refused to discuss the method of repatriation.

"For the majority of them, conditions have changed in their country and they can return. People will remain in the centre until they can be sent home," a Dima spokesman said. Those who do return will be offered A$2,000 (£700) from the Australian government.

In a final twist of the bizarre system under which Canberra has run the Pacific solution, there is no guarantee that the 66 who have been found to be refugees will be allowed to move to Australia. Dima said they had only been "found to be", rather than "accepted as", refugees, and would now have to apply separately for residency in Australia.

Many of the inmates were among the 438 people on board the Tampa, the Norwegian container ship left stranded off Australia's northwest coast last summer when both Australia and Indonesia refused to accept the refugees that the ship's crew had rescued from a sinking boat.

The opposition Labor party says the policy has cost the government A$500m, and conditions at the camp have been described by Amnesty International as "inhumane" and "hellish".

Yesterday's announcement comes too late for Mohammed Sarwar, an Afghan refugee who died in the Nauru camp a fortnight ago on the anniversary of the Tampa rescue.

Fellow inmates say Sarwar, 26, died the day after having his application turned down. Dima says he died of natural causes, although it has not released the details of a post-mortem.

"He waited exactly one year after his saving by Tampa with 100 kinds of psychological pressures and finally went to God's perpetual asylum," wrote Mustafa Najib, a fellow inmate and Tampa refugee.

"I've seen people in that camp sink from optimism into this terrible despair and depression," said Grace Gorman, a refugee campaigner. "It doesn't really matter when the government manages to get them out any more. One by one they will die of bloody grief."